Default Risk is an Outcome of Rollover Risk: An Empirical Evidence from the Korean Stock Market

The present study explores the relationship between rollover risk and default risk, based on an empirical analysis of manufacturing firms listed on the Korean stock exchange, during 2005-2016 in South Korea. Rollover risk is measured by the current portion of long-term debt maturing in one year and is weighted by total assets. Based on Merton's model, the expected default frequency (a measure of default risk) is statistically in a significant relationship with rollover risk. The analysis shows that a one percent rise in rollover risk leads to an increase of 20.60% in default risk. Additionally, an effect of micro-level amplification factor (decline in profitability) and macro level amplification factor(recession) is also explored. Declining profitability of Korean manufacturing firms does not affect the relationship between rollover risk and default risk. Similarly, globally tight market conditions during the global crises period 2007-2009, has no contributions in enhancing the rollover risk and default risk of Korean manufacturing sector firms.